OTTAWA — The Financial institution of Canada mentioned on Thursday the general threat to the Canadian monetary system was barely increased than in June 2018, and expressed concern concerning the growing menace posed by fragile company debt funding.
“General, the monetary system stays resilient, and confidence amongst market members continues to be excessive,” it mentioned in its annual evaluate of economic methods.
The central financial institution cited a slowdown in financial development, final yr’s oil worth droop, persevering with issues within the vitality sector and expanded risk-taking in world monetary markets as causes for the elevated threat.
The Financial institution of Canada raised rates of interest 5 instances from July 2017 to October 2018 however has been on maintain since then because the economic system slowed.
Within the evaluate it mentioned the principle dangers to the system remained a extreme nationwide recession, a big home worth correction and a pointy repricing of threat in monetary markets. Canadian banks have been properly positioned to deal with such challenges, it added.
And for the primary time, it particularly highlighted the dangers posed in Canada and different nations by fragile company debt funding, particularly amongst lower-rated corporations.
“Investor urge for food for high-yield bonds and leveraged loans has pushed this improve in borrowing, thus making future exercise inclined to shifts in investor sentiment. We might be monitoring this intently,” it mentioned.
The problem for Canada is that lots of the corporations concerned are elevating cash on U.S. markets.
“Persistent issues in these markets may have broader implications for monetary stability in Canada by way of the macroeconomic results of a decline in company funding availability in the USA,” it mentioned.
Market members proceed to see cyber incidents as the best threat to the Canadian monetary system, particularly issues at third-party service suppliers.
Vulnerabilities related to excessive family debt and imbalances within the housing market – elements the financial institution has been fretting about for a number of years – have declined modestly however stay vital.
“Regardless of this progress, we have to stay vigilant as the general stage of indebtedness continues to be excessive, with a big portion of that debt held by extremely indebted households,” the evaluate famous.
© Thomson Reuters 2019